Monday, October 12, 2015

I hope Angus Deaton gets a chance to cancel out Tom Sargent

Tom Sargent's old graduation speech about what econ (purportedly) teaches us came up again recently in my Twitter feed from Cameron Murray with a reference to the Nobel prize in economics making it topical for today.

Noah Smith did a pretty good job of going through it awhile ago from a more mainstream viewpoint. However, I thought I'd give it a information equilibrium perspective take (as well as my own opinions).

1. Many things that are desirable are not feasible.
This is kind of vague. The first thing that comes to mind for me is warp drive, but that has nothing to do with lessons from economics.
2. Individuals and communities face trade-offs.
But you really shouldn't assume this going into an economic analysis. Maybe there is a win-win; maybe there is a win-win in a given framework.
3. Other people have more information about their abilities, their efforts, and their preferences than you do.
When it comes to preferences, that's not really true -- at least in the technical economics definition of well-defined preferences. No one has good information about preferences because they are not necessarily stable nor transitive. Preferences may become well-defined, but only in aggregate.
4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.
I've written about incentives -- people don't respond to them so much as wander into the state space opened up by e.g. offering tax breaks. And a social safety net may be the key to allowing more people to explore that state space resulting in economic growth.
5. There are trade offs between equality and efficiency.
If information entropy is the key to economic growth, then more equality (higher entropy distribution) means more efficiency.
6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well meaning outsiders to change things for better or worse.
This requires stable, transitive preferences (utility as a real-valued function). This is not necessarily a property of agents, but rather an emergent property. In that case, it wouldn't be true of individuals.
7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.
I covered incentives above in #4.
8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.
This one is funny if you think about Greece because it predicts the exact opposite of what has happened: Greece stays in Euro and doesn't default on loans ... keeping promises when a) there are incentives not to keep them and b) keeping the promise is long run unsustainable.
9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).
This is not only feasible, but desireable. Maximizing the number of effective time periods maximizes output, asset value and utility. See also #10.
10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.
Actually, neither debt nor anything else seems to generate inflation when the information transfer index k ~ 1 unless the spending levels are so large as to change the relative size of nominal output and the monetary base (minus reserves) by a sizable fraction ... in logarithm. That is to say, big enough to change k
Also, Japan has been getting away with this for awhile.
11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).
Most people think of the government's budget as a household budget. Most people think the budget deficit gets worse when the President of the opposite political affiliation is in office. Most people aren't data-driven and don't really know how this stuff works. 
This one is especially funny; why would an economics professor give credence to what people who haven't studied the subject think? Does he think whatever it is that he learned is useless? Or did he learn that after thinking about it you should defer to "most people"?
I think most people think quantum processes are actually deterministic in some way. Should physicists take heed?
12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.
The market doesn't always work as an information aggregation mechanism. And exchange rates and interest rates may be volatile, but aren't necessarily unpredictable.


1 comment:

  1. Great commentary! :)

    A couple of my own, for now.

    Noah: "Many things that are desirable are not feasible."

    Or, "Man's reach exceeds his grasp."

    Noah: "Everyone responds to incentives, including people you want to help."

    Vacuous. Or code for homo economicus dogma.

    Noah: "That is why social safety nets don’t always end up working as intended." In human affairs, almost nothing ends up working as intended. ;)

    Noah: "There are trade offs between equality and efficiency."

    Jason: "If information entropy is the key to economic growth, then more equality (higher entropy distribution) means more efficiency."

    Efficiency is a derivative good. It depends upon what your aim is. Economists generally regard taking money from the rich as inefficient, by definition.

    Noah: "In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well meaning outsiders to change things for better or worse."

    False. Multiple equilibria exist, including suboptimal equilibria, in which at least some people are dissatisfied with their choices. Also, unstable equilibria exist. Human systems are typically chaotic or on the edge of chaos.

    Noah: "Governments and voters respond to incentives too." Governments do not have incentives, as a rule. That view is a remnant of the 18th and 19th centuries, when monarchy was the norm. Government officials have incentives, but that is not the same thing. Dictators have incentives, but republican government, particularly democratic republican government, is too incoherent to have anything like incentives.

    Personifying government leads to such silliness as regarding taxation as theft. That may make sense in a dictatorship, and it may have made sense under a monarchy, but it makes no sense under a republic. Especially a republic that can create money at will. :)

    Noah: "When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation."

    Who do they pay? The government? But that is a category error. The creditors? They are usually dead. The Rothschilds? Well, back in the day, maybe. See comment about the 18th and 19th centuries. The IMF? See economic imperialism. Typically some citizens pay money to other citizens alive at the same time, if you do the bookkeeping that way. And yes, the payees are usually older than the payers. See retirement.

    Now it is true that you can do the bookkeeping so that debts are eventually paid off. But, as Adam Smith pointed out, back in the good old gold standard days, governments roll over their debt.

    Jason: "Also, Japan has been getting away with this for awhile." Indeed. Going back at least to 1700. :)

    Noah: "It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore)."

    Jason: "This is not only feasible, but desireable. Maximizing the number of effective time periods maximizes output, asset value and utility. See also #10."

    Desirable indeed. Through hyperinflation of the Continental Dollar citizens paid for much of the Revolution too quickly. Many people were ruined.

    This is not only feasible, but desireable. Maximizing the number of effective time periods maximizes output, asset value and utility. See also #10.

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